FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
S | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE | |
SECURITIES EXCHANGE ACT OF 1934 | ||
For the Quarterly period ended March 31, 2010 | ||
OR |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE | |
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from | to |
Commission file number 0-9032
SONESTA INTERNATIONAL HOTELS CORPORATION
(Exact name of registrant as specified in its charter)
![](https://capedge.com/proxy/10-Q/0000091741-10-000009/sihc_colorlogo.jpg)
NEW YORK | 13-5648107 | |
(State or other jurisdiction or incorporation or organization) | (I.R.S. Employer Identification No.) |
116 Huntington Avenue, Boston, MA 02116
(Address of principal executive offices) (Zip Code)
617-421-5400 |
(Registrant’s telephone number, including area code) |
(Former name, former address and former fiscal year, |
if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes S | No |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Exchange Act Rule 12b-2);
Large Accelerated Filer Accelerated Filer Non-Accelerated Filer
Smaller Reporting Company S
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes | No S |
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of Shares of Common Stock Outstanding
As of May 12, 2010 -- $.80 par value,
Class A – 3,698,230
SONESTA INTERNATIONAL HOTELS CORPORATION
Page | ||
Amendment to partnership agreement of SBR-Fortune Associates, LLLP, dated as of June 18, 2009. This agreement was previously filed with our report on Form 10-Q on August 13, 2009 but certain portions were omitted pursuant to a request for confidential treatment at that time. The attached is a complete copy of the agreement. | ||
Certifications by the Company’s Chief Executive Officers and Vice President and Treasurer, as required by Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended. | ||
Certification by Company Officers required by 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002). |
SONESTA INTERNATIONAL HOTELS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2010 (unaudited) and December 31, 2009
(in thousands) | ||||||||
March 31, 2010 | December 31, 2009 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 26,441 | $ | 35,557 | ||||
Accounts and notes receivable: | ||||||||
Trade, less allowance of $74 ($70 at December 31, 2009) fordoubtful accounts | 5,010 | 5,092 | ||||||
Other, including current portion of long-term receivables andadvances | 1,558 | 1,242 | ||||||
Total accounts and notes receivable | 6,568 | 6,334 | ||||||
Inventories | 603 | 623 | ||||||
Current deferred tax assets | 553 | 476 | ||||||
Prepaid expenses and other current assets | 1,365 | 1,242 | ||||||
Total current assets | 35,530 | 44,232 | ||||||
Restricted cash | 5,000 | -- | ||||||
Long-term receivables and advances | 1,529 | 1,354 | ||||||
Property and equipment, at cost: | ||||||||
Land and land improvements | 2,102 | 2,102 | ||||||
Buildings | 25,721 | 25,721 | ||||||
Furniture and equipment | 31,459 | 30,859 | ||||||
Leasehold improvements | 9,122 | 9,109 | ||||||
Projects in progress | -- | 64 | ||||||
68,404 | 67,855 | |||||||
Less accumulated depreciation and amortization | 34,927 | 33,585 | ||||||
Net property and equipment | 33,477 | 34,270 | ||||||
Other long-term assets | 1,352 | 875 | ||||||
$ | 76,888 | $ | 80,731 |
See accompanying notes to condensed consolidated financial statements.
SONESTA INTERNATIONAL HOTELS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2010 (unaudited) and December 31, 2009
(in thousands) | ||||||||
March 31, 2010 | December 31, 2009 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Current portion of long-term debt | $ | 536 | $ | 594 | ||||
Accounts payable | 2,866 | 2,887 | ||||||
Advance deposits | 1,292 | 1,103 | ||||||
Accrued income taxes | 562 | 327 | ||||||
Accrued liabilities: | ||||||||
Salaries and wages | 1,169 | 1,278 | ||||||
Rentals | 1,023 | 3,741 | ||||||
Interest | 176 | 236 | ||||||
Pension and other employee benefits | 2,463 | 2,064 | ||||||
Interest rate swap | 742 | -- | ||||||
Other | 1,400 | 1,028 | ||||||
6,973 | 8,347 | |||||||
Total current liabilities | 12,229 | 13,258 | ||||||
Long-term debt | 31,464 | 31,245 | ||||||
Pension liability, non-current | 6,195 | 6,554 | ||||||
Other non-current liabilities | 992 | 1,082 | ||||||
Deferred tax liabilities | 1,017 | 1,939 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Common stock: | ||||||||
Class A, $.80 par value | ||||||||
Authorized--10,000 shares | ||||||||
Issued – 6,102 shares at stated value | 4,882 | 4,882 | ||||||
Retained earnings | 34,542 | 35,734 | ||||||
Treasury shares – 2,404, at cost | (12,053 | ) | (12,053 | ) | ||||
Accumulated other comprehensive loss | (2,380 | ) | (1,910 | ) | ||||
Total stockholders’ equity | 24,991 | 26,653 | ||||||
$ | 76,888 | $ | 80,731 |
See accompanying notes to condensed consolidated financial statements.
SONESTA INTERNATIONAL HOTELS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands except for per share data)
Three Months Ended March 31 | ||||||||
2010 | 2009 | |||||||
Revenues: | ||||||||
Rooms | $ | 8,190 | $ | 7,419 | ||||
Food and beverage | 4,114 | 3,477 | ||||||
Management, license and service fees | 1,399 | 1,126 | ||||||
Parking, telephone and other | 1,059 | 1,081 | ||||||
14,762 | 13,103 | |||||||
Other revenues from managed and affiliated properties | 1,370 | 1,221 | ||||||
Total revenues | 16,132 | 14,324 | ||||||
Costs and expenses: | ||||||||
Costs and operating expenses | 7,313 | 6,585 | ||||||
Advertising and promotion | 1,562 | 1,376 | ||||||
Administrative and general | 3,075 | 3,211 | ||||||
Human resources | 280 | 251 | ||||||
Maintenance | 878 | 846 | ||||||
Rentals | 1,145 | 1,525 | ||||||
Property taxes | 280 | 354 | ||||||
Depreciation and amortization | 1,380 | 1,355 | ||||||
15,913 | 15,503 | |||||||
Other expenses from managed and affiliated properties | 1,370 | 1,221 | ||||||
Total costs and expenses | 17,283 | 16,724 | ||||||
Operating loss | (1,151 | ) | (2,400 | ) | ||||
Other income (deductions): | ||||||||
Interest expense | (567 | ) | (716 | ) | ||||
Interest income | 60 | 123 | ||||||
Foreign exchange loss | (5 | ) | (11 | ) | ||||
Gain (loss) on sales of assets | (4 | ) | 2 | |||||
(516 | ) | (602 | ) | |||||
Loss before income tax benefit | (1,667 | ) | (3,002 | ) | ||||
Income tax benefit | (475 | ) | (790 | ) | ||||
Net loss | (1,192 | ) | (2,212 | ) | ||||
Cash dividends | -- | -- | ||||||
Retained earnings at beginning of period | 35,734 | 14,155 | ||||||
Retained earnings at end of period | $ | 34,542 | $ | 11,943 | ||||
Net loss per share of common stock | $ | (0.32 | ) | $ | (0.60 | ) | ||
Weighted average number of shares outstanding | 3,698 | 3,698 |
See accompanying notes to condensed consolidated financial statements.
SONESTA INTERNATIONAL HOTELS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Increase (Decrease) in Cash
(in thousands) | ||||||||
Three Months Ended March 31 | ||||||||
2010 | 2009 | |||||||
Cash used for operating activities | ||||||||
Net loss | $ | (1,192 | ) | $ | (2,212 | ) | ||
Adjustments to reconcile net loss to net cash used for operating activities | ||||||||
Depreciation and amortization of property and equipment | 1,380 | 1,355 | ||||||
Other amortization | 35 | 23 | ||||||
Deferred federal and state tax benefit | (726 | ) | (934 | ) | ||||
Loss (gain) on sales of assets | 4 | (2 | ) | |||||
Changes in assets and liabilities | ||||||||
Restricted cash | -- | 158 | ||||||
Accounts and notes receivable | 33 | 613 | ||||||
Inventories | 20 | 78 | ||||||
Prepaid expenses and other | (39 | ) | (160 | ) | ||||
Accounts payable | (21 | ) | (186 | ) | ||||
Advance deposits | 189 | 286 | ||||||
Federal, foreign and state income taxes | 200 | 118 | ||||||
Accrued liabilities | (2,565 | ) | (4,292 | ) | ||||
Cash used for operating activities | (2,682 | ) | (5,155 | ) | ||||
Cash used for investing activities | ||||||||
Expenditures for property and equipment | (585 | ) | (1,847 | ) | ||||
Payments received on long-term receivables and advances | 340 | 69 | ||||||
Investment in development partnership | -- | (842 | ) | |||||
Proceeds from sales of assets | 7 | 33 | ||||||
New loans and advances | (958 | ) | (36 | ) | ||||
Cash used for investing activities | (1,196 | ) | (2,623 | ) | ||||
Cash used for financing activities | ||||||||
Proceeds from issuance of long-term debt | 32,000 | -- | ||||||
Cost of financing | (399 | ) | -- | |||||
Payments on refinancing of long-term debt | (31,644 | ) | -- | |||||
Restricted cash | (5,000 | ) | -- | |||||
Scheduled payments on long term debt | (195 | ) | (291 | ) | ||||
Cash dividends paid | -- | (925 | ) | |||||
Cash used for financing activities | (5,238 | ) | (1,216 | ) | ||||
Net decrease in cash | (9,116 | ) | (8,994 | ) | ||||
Cash and cash equivalents at beginning of period | 35,557 | 37,463 | ||||||
Cash and cash equivalents at end of period | $ | 26,441 | $ | 28,469 |
Supplemental Schedule of Interest and Income Taxes Paid |
Cash paid for interest in the 2010 three-month period and the 2009 three-month period was approximately $603,000 and $708,000, respectively. Cash paid for income taxes in the first quarter of 2010 and 2009 was approximately $51,000 and $23,000, respectively.
See accompanying notes to condensed consolidated financial statements.
SONESTA INTERNATIONAL HOTELS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. | Basis of Presentation |
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ended December 31, 2010.
The balance sheet at December 31, 2009 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
The Company evaluated all events and transactions that occurred after March 31, 2010 through the date this report was filed.
For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
2. | Long-Term Receivables and Advances |
(in thousands) | ||||||||
March 31,2010 | December 31,2009 | |||||||
Sharm El Sheikh, Egypt (a) | $ | 869 | $ | 940 | ||||
Sharm El Sheikh, Egypt (b) | 475 | -- | ||||||
Luxor, Egypt (c) | 1,089 | 1,311 | ||||||
St. Maarten, Netherlands Antilles (d) | 284 | -- | ||||||
Other | 199 | 215 | ||||||
Total long-term receivables and advances | 2,916 | 2,466 | ||||||
Less: current portion | 1,387 | 1,112 | ||||||
Net long-term receivables and advances | $ | 1,529 | $ | 1,354 |
(a) | This loan was made in January 2008 to the owners of Sonesta Beach Hotel Sharm El Sheikh and Sonesta Club Sharm El Sheikh by converting receivables for fees and expenses into a five-year loan, payable in monthly installments, starting in January 2008. The Company is accounting for this loan using an effective interest rate of 6.5%. Monthly payments of $28,820 on this loan are paid directly from the hotels and deducted from distributions of profits to the owner of these managed hotels. |
(b) | This loan, in the original amount of $500,000, was made in January 2010 to the owner of Sonesta Beach Resort Sharm El Sheikh. The interest rate is 5.25%, and the loan has a three year term. Monthly payments of principal and interest of $15,075 commenced in February 2010. |
(c) | These loans, in the original amount of $1,363,000, were made in August 2009 to the owner of Sonesta St. George Hotel Luxor and Sonesta St. George I Cruise Ship, which are both managed by the Company. The loans consist of cash advances of $500,000, and the conversion of receivables for fees and expenses due to the Company totaling $863,000. The Company made these loans to assist the owner with the financing of improvements to the Sonesta St. George Hotel Luxor, which included additional guest rooms and meeting/function space. The interest rate is 5.25%, and monthly payments of interest and principal commenced in November 2009. The last payment is due October 2011. |
SONESTA INTERNATIONAL HOTELS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(d) | In February 2010, the Company agreed to loan up to $1,000,000 to the owners of two hotels in St. Maarten, to which the Company licenses the use of its name. At the same time, the license agreements for these hotels were extended until December 2019, with a mutual cancellation option beginning in May 2015. The proceeds will be used to fund improvements at both of the properties. The Company expects to fund the entire loan amount in 2010. The loans shall be repaid in 10 annual payments of $100,000, the first of which will be due on March 31, 2011. Interest is due quarterly and will be based on LIBOR plus a surcharge based on increases in room revenues from year to year. The maximum surcharge is 1.5% per annum. The Company is accounting for this loan using an effective interest rate of 6% and has discounted the loan accordingly. The discount has been recorded as an other long-term asset and is amortized over the remaining term of the license agreements. |
Management continually monitors the collectability of its receivables and advances and believes they are fully realizable.
3. | Borrowing Arrangements |
Long-Term Debt
The Company’s long-term debt consists of a first mortgage note payable by Charterhouse of Cambridge Trust and Sonesta of Massachusetts, Inc., which are the Company’s subsidiaries that own and operate the Royal Sonesta Hotel Boston. The mortgage loan was refinanced in February 2010. A new $32,000,000 loan repaid the $31,644,000 outstanding under the previous loan. Costs incurred in connection with the refinancing totaled approximately $400,000, which included a 1% fee to the lender. The new loan, which will mature March 1, 2015, has a variable rate based on LIBOR, but the Company has entered into an interest swap agreement that provides for a 6.4% fixed interest rate for the term of the loan. Payments of interest and principal, based on a 25 year amortization period, will be approximately $650,000 per quarter.
The loan is secured by a first mortgage on the Royal Sonesta Hotel Boston property which is included in fixed assets at a net book value of $19,012,000 at March 31, 2010. As additional security, the Company provides a $5,000,000 parent company guaranty and established a restricted cash collateral account in the amount of $5,000,000. This cash collateral account will be released over a two year period provided the Hotel achieves certain debt service coverage ratios. The loan is subject to a maximum loan to value ratio, and to minimum debt service coverage ratios, which will be tested quarterly based on trailing twelve month earnings of the Hotel.
4. | Hotel Costs and Operating Expenses |
Hotel costs and operating expenses in the accompanying condensed Consolidated Statements of Operations are summarized below:
(in thousands) | ||||||||
Three Months Ended March 31 | ||||||||
2010 | 2009 | |||||||
Direct departmental costs | ||||||||
Rooms | $ | 2,435 | $ | 2,156 | ||||
Food and beverage | 3,610 | 3,152 | ||||||
Heat, light and power | 618 | 662 | ||||||
Other | 650 | 615 | ||||||
$ | 7,313 | $ | 6,585 |
Direct departmental costs include payroll expenses and related payroll burden, the cost of food and beverage consumed and other departmental costs.
SONESTA INTERNATIONAL HOTELS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. | Segment Information |
Segment information for the Company’s two reportable segments, Owned & Leased Hotels and Management Activities, for the three-month periods ending March 31, 2010 and 2009 follows:
Quarter ended March 31, 2010
(in thousands) | ||||||||||||
Owned & Leased Hotels | Management Activities | Consolidated | ||||||||||
Revenues | $ | 13,359 | $ | 1,403 | $ | 14,762 | ||||||
Other revenues from managed and | ||||||||||||
affiliated properties | -- | 1,370 | 1,370 | |||||||||
Total revenues | 13,359 | 2,773 | 16,132 | |||||||||
Operating income (loss) before depreciation and amortization expense | 1,044 | (815 | ) | 229 | ||||||||
Depreciation and amortization | (1,313 | ) | (67 | ) | (1,380 | ) | ||||||
Interest income (expense), net | (564 | ) | 57 | (507 | ) | |||||||
Other deductions | -- | (9 | ) | (9 | ) | |||||||
Segment pre-tax loss | (833 | ) | (834 | ) | (1,667 | ) | ||||||
Segment assets | 42,996 | 33,892 | 76,888 | |||||||||
Segment capital additions | 509 | 76 | 585 |
Quarter ended March 31, 2009
(in thousands) | ||||||||||||
Owned & Leased Hotels | Management Activities | Consolidated | ||||||||||
Revenues | $ | 11,970 | $ | 1,133 | $ | 13,103 | ||||||
Other revenues from managed and | ||||||||||||
affiliated properties | -- | 1,221 | 1,221 | |||||||||
Total revenues | 11,970 | 2,354 | 14,324 | |||||||||
Operating loss before depreciation and amortization expense | (24 | ) | (1,021 | ) | (1,045 | ) | ||||||
Depreciation and amortization | (1,290 | ) | (65 | ) | (1,355 | ) | ||||||
Interest income (expense), net | (713 | ) | 120 | (593 | ) | |||||||
Other deductions | -- | (9 | ) | (9 | ) | |||||||
Segment pre-tax loss | (2,027 | ) | (975 | ) | (3,002 | ) | ||||||
Segment assets | 74,111 | 45,418 | 119,529 | |||||||||
Segment capital additions | 1,799 | 48 | 1,847 |
SONESTA INTERNATIONAL HOTELS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. | Comprehensive Income (Loss) |
Comprehensive income (loss) is as follows:
(in thousands) | ||||||||
Three Months ended March 31 | ||||||||
2010 | 2009 | |||||||
Net Loss | $ | (1,192 | ) | $ | (2,212 | ) | ||
Unrealized loss on interest rate swap, net of tax of $272 | $ | (470 | ) | $ | -- | |||
Comprehensive loss | $ | (1,662 | ) | $ | (2,212 | ) |
7. | Earnings (Loss) per Share |
As the Company has no dilutive securities, there is no difference between basic and diluted earnings per share of common stock. The following table sets forth the computation of basic income or losses per share of common stock (in thousands except for per share data):
Three months ended March 31 | ||||||||
2010 | 2009 | |||||||
Numerator: | ||||||||
Loss from operations | $ | (1,192 | ) | $ | (2,212 | ) | ||
Denominator: | ||||||||
Weighted average number of shares outstanding | 3,698 | 3,698 | ||||||
Loss per share of common stock | $ | (0.32 | ) | $ | (0.60 | ) |
8. | Pension Plan |
The components of the net periodic pension cost for the Company’s Pension Plan were as follows:
(in thousands) | ||||||||
Three Months ended March 31 | ||||||||
2010 | 2009 | |||||||
Service cost | $ | -- | $ | 21 | ||||
Interest cost | 405 | 408 | ||||||
Expected return on assets | (414 | ) | (429 | ) | ||||
Recognized actuarial loss | 41 | 23 | ||||||
Net expense included in the consolidated statements of operations | $ | 32 | $ | 23 |
SONESTA INTERNATIONAL HOTELS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company froze its Pension Plan effective December 31, 2006. Additional service and/or compensation increases after January 1, 2007 will not increase participants’ benefits and, in addition, newly hired employees will not receive benefits under the Plan. For additional information on the Pension Plan, and the Company’s 401(k) savings plan, we refer to footnote 8 of the Company’s 2008 Annual Report filed on Form 10-K.
The Company currently plans to make quarterly contributions of approximately $391,000 to the Pension Plan on April 15, July 15 and October 15, 2010, and on January 15, 2011. Accordingly, these amounts have been classified as a current liability.
The Company does not have any other post-retirement benefit plans.
9. | Derivative Financial Instruments |
In February 2010, the Company refinanced an existing mortgage loan with a new loan, which has a variable rate based on LIBOR (see note 3 – Borrowing arrangements). The Company entered into an interest rate swap agreement to manage the interest rate risk associated with this loan. The critical terms of the swap agreement match the critical terms of the mortgage loan. Therefore, the Company designated the interest rate swap as a cash flow hedge of the variable rate borrowings. The Company does not engage in speculative transactions, nor does it hold or issue financial instruments for trading purposes. The counterparty to the Company’s swap agreement is a financial institution with investment grade credit ratings. Prior to 2010 the Company did not engage in any derivative activities.
Cash Flow Hedging Strategy
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (“OCI”) and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings (e.g., in “interest expense” when the hedged transactions are interest cash flows associated with variable rate debt). The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, or ineffectiveness, if any, is recognized in the statement of operations during the current period.
The interest rate swap agreement the Company entered into manages the interest rate risk on its mortgage loan described in note 3. The forward-starting interest rate swap with a notional amount of $32,000,000 converts the variable rate of LIBOR plus 3.35% on the $32,000,000 principal amount of the loan to a fixed rate of 6.4% for the 5 year term of the loan.
As the terms of the swap match the terms of the underlying hedged mortgage loan, there should be no gain or loss from the ineffectiveness recognized in income unless there is a termination of the swap or a modification to the mortgage loan terms. If the loan terms remain unchanged, and all payments are being made when scheduled, there will be no future impact on the Company’s results from operations. Based upon quotes, the fair value of the interest rate swap was a $(742,000) liability as of March 31, 2010.
SONESTA INTERNATIONAL HOTELS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair value of the Company’s derivative instruments based upon quotes, with appropriate adjustments for non-performance risk of the parties to the derivative contracts, at March 31, 2010 is as follows:
(in thousands) | ||||
Liability Derivatives | ||||
2010 | ||||
Derivatives designated as hedging instruments: | ||||
Interest rate swap – cash flow hedge | $ | 742 | ||
Total derivatives designated as hedging instruments | $ | 742 | ||
Derivatives not designated as hedging instruments: | $ | -- | ||
Total derivatives | $ | 742 |
The effect of derivative instruments on the statement of operations for the three month period ended March 31, 2010 is as follows (in thousands):
Pre-tax Loss Recognized in OCI on Derivative (Effective Portion) | Amount Reclassified from Accumulated OCI into Income | ||||||||
Derivatives in Cash Flow Hedging Relationships | 2010 | Location of Amount Reclassified from Accumulated OCI into Income | 2010 | ||||||
Interest rate swap | $ | (742 | ) | Interest expense | $ | -- | |||
__ | |||||||||
Total | $ | (742 | ) | Total | $ | -- |
10. | Fair Value Measurements |
The Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
As of March 31, 2010, the Company held an interest rate swap instrument that is required to be measured at fair value on a recurring basis (see Note 9). The Company determines the fair value of the swap contract based on quotes, with appropriate adjustments for any significant impact of non-performance risk of the parties to the swap contracts. Therefore, the Company has categorized the swap contract as Level 2. The Company has consistently applied these valuation techniques in all periods presented and believes it has obtained the most accurate information available for the type of derivative contract it holds.
SONESTA INTERNATIONAL HOTELS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company’s assets (liabilities) measured at fair value on a recurring basis at March 31, 2010, was as follows (in thousands):
(in thousands) | ||||||||||||||||
Quoted Prices in Active Markets for Identical Assets | Significant Observable Inputs | Significant Unobservable Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
Interest rate swap | $ | -- | $ | (742 | ) | $ | -- | $ | (742 | ) |
The remainder of the assets and liabilities held by the Company at March 31, 2010 are not required to be measured at fair value. The carrying amount of short-term financial instruments (cash and cash equivalents, restricted cash, trade receivables, accounts payable and accrued liabilities) approximates fair value due to the short maturity of those instruments. The concentration of credit risk on trade receivables is minimized by diverse nature of the Company’s customer base. The carrying value of the Company’s term mortgage loan approximates its fair value due to its variable interest rate and proximity to the refinancing.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FIRST QUARTER 2010 COMPARED TO 2009
In the first quarter of 2010 the Company recorded a net loss of $1,192,000, or $(0.32) per share, compared to a net loss of $2,212,000, or $(0.60) per share, during the first quarter of 2009.
Business levels at the Company’s owned and leased hotels improved during the first quarter of 2010 compared to the same quarter in 2009. Operating losses at Royal Sonesta Hotel Boston decreased from $1,513,000 in the first quarter of 2009 to $1,405,000 in the 2010 first quarter, a decrease of $108,000. Royal Sonesta New Orleans recorded operating income of $1,137,000 in the 2010 first quarter compared to $199,000 last year, representing an increase of $938,000. This increase was the result of a 12% revenue increase, and lower rent expense. Operating losses from management activities decreased by $270,000 to $883,000 in the 2010 first quarter, due to increased management income from the Company’s hotels and ships in Egypt as well as increased franchise income. Interest expense decreased following the refinancing of the mortgage loan secured by Royal Sonesta Hotel Boston in February 2010. A detailed analysis of the revenues and income by location follows.
REVENUES
The Company records costs incurred on behalf of owners of managed and affiliated properties, and expenses reimbursed from managed and affiliated properties, on a gross basis. The revenues included and discussed in this Management’s Discussion and Analysis exclude the “other revenues and expenses from managed and affiliated properties.”
TOTAL REVENUES (in thousands) | ||||||||||||
NO. OF ROOMS | 2010 | 2009 | ||||||||||
Royal Sonesta Hotel Boston | 400 | $ | 3,728 | $ | 3,350 | |||||||
Royal Sonesta Hotel New Orleans | 500 | 9,631 | 8,620 | |||||||||
Management and service fees and other revenues | 1,403 | 1,133 | ||||||||||
Total revenues, excluding other revenues frommanaged and affiliated properties | $ | 14,762 | $ | 13,103 |
Total revenues for the quarter ended March 31, 2010 were $14,762,000 compared to $13,103,000 in the 2009 quarter, an increase of $1,659,000.
Royal Sonesta Hotel Boston recorded first quarter 2010 revenues of $3,728,000 compared to first quarter 2009 revenues of $3,350,000, representing a $378,000, or 11%, increase. Room revenues during the 2010 first quarter increased by $276,000, due to a 14% increase in room revenue per available room (“REVPAR”). The hotel’s occupancy during the first quarter of 2010 surpassed last year’s by 10 percentage points. However, the average daily rate decreased by 9%, which reflected the continuing competitive market in the 2010 first quarter due to the economic recession. Increases in rooms revenues were primarily from the transient market segment. The remaining increase in revenues of $102,000 was primarily from increased parking revenues and increased food and beverage revenues from the hotel’s ArtBar restaurant and banqueting department, due to the higher occupancy levels.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
Royal Sonesta Hotel New Orleans recorded first quarter 2010 revenues of $9,631,000 compared to $8,620,000 during the first quarter of 2009, representing a $1,011,000, or 12%, increase. Room revenues increased by $495,000 due to a 9% REVPAR increase. The hotel’s occupancy during the 2010 first quarter improved by 7.5 percentage points compared to last year due to improved business from both the transient and group and convention market segments. The hotel’s average daily rate was down by a modest 3% due to a decrease in average daily rates from the group and convention market segment. The remaining increase in revenues of $516,000 was almost entirely due to increased food and beverage revenues. The increased occupancy levels improved restaurant and banqueting business. In addition, the hotel recorded increased beverage revenues due to higher beverage sales from the hotel’s main lounge, which was converted into Irvin Mayfield’s Jazz Playhouse in late March 2009. In addition, the hotel generated revenues from a newly created PJ’s coffee shop in the hotel’s lobby. This new coffee shop outlet opened in December 2009.
Revenues from management activities increased from $1,133,000 in the 2009 first quarter to $1,403,000 during the 2010 first quarter, an increase of $270,000. This was mainly due to a $130,000 increase in management income from the Company’s collection of hotels and cruise ships in Egypt, and a $105,000 increase in franchise income. The franchise income included fees from Sonesta Hotel Orlando Downtown, which was reflagged as a Sonesta hotel in January 2010.
OPERATING INCOME
OPERATING INCOME (LOSS) (in thousands) | ||||||||
2010 | 2009 | |||||||
Royal Sonesta Hotel Boston | $ | (1,405 | ) | $ | (1,513 | ) | ||
Royal Sonesta Hotel New Orleans | 1,137 | 199 | ||||||
Operating loss from hotels after management and service fees | (268 | ) | (1,314 | ) | ||||
Management activities and other | (883 | ) | (1,086 | ) | ||||
Operating loss | $ | (1,151 | ) | $ | (2,400 | ) |
Operating loss for the three-month period ended March 31, 2010 decreased by $1,249,000 to $1,151,000.
Operating losses at Royal Sonesta Hotel Boston during the traditionally slow first quarter decreased from $1,513,000 in 2009 to $1,405,000 in 2010. Increases in revenues of $378,000 were partially offset by increased expenses of $270,000. This expense increase was primarily due to a $333,000 increase in costs and operating expenses, representing a 13% increase. During the 2010 first quarter, the hotel’s occupancy levels exceeded the same period in 2009 by 10 percentage points, which resulted in higher payroll expenses and increased costs for supplies.
Operating income from Royal Sonesta Hotel New Orleans increased from $199,000 during the 2009 first quarter to $1,137,000 during the 2010 first quarter, a $938,000 increase. Revenue increases of $1,011,000 were partially offset by a very modest $73,000 increase in expenses. Costs and operating expenses increased by $357,000, or 9%, due to higher payroll and other expenses resulting from the increase in occupancy levels during the 2010 quarter compared to 2009. Rent expense decreased by $389,000 in the 2010 quarter compared to last year, despite an increase in operating profits. The Company operates the Royal Sonesta New Orleans under a lease, and rent is equal to 75% of net cash flow achieved. Capital expenditures are deducted from net cash flow for rent purposes, and in 2010 the Company expects to substantially increase capital expenditures compared to 2009, mainly due to the planned addition of a signature restaurant to the hotel. The increased capital expenditures will result in lower rent expense.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
The Company’s operating loss from management activities, which is computed after giving effect to management and marketing fees from owned and leased hotels, decreased from $1,086,000 during the 2009 first quarter to $883,000 during the 2010 first quarter, a decrease of $203,000. Increases in management income of $270,000 were partially offset by a $67,000 increase in expenses related to these activities. Increases in corporate sales and marketing expenses were partially offset by a decrease in administrative and general expense. The decrease in administrative and general expense was mainly due to a non-recurring $150,000 expense during the 2009 first quarter related to costs incurred for a hotel project in Miami. The Company started work on this project during 2008 but decided in February 2009 not to pursue this opportunity.
OTHER INCOME (DEDUCTIONS)
Interest income decreased from $123,000 in the 2009 first quarter to $60,000 in the 2010 first quarter. The decrease was due to lower short-term investment income earned on the Company’s cash balances, due to the lower rates of return.
Interest expense decreased from $716,000 in the 2009 quarter to $567,000 in the 2010 first quarter. This was the result of the refinancing in February 2010 of the mortgage loan secured by Royal Sonesta Hotel Boston. The interest rate on the new loan is 6.4% compared to 8.6% on the loan which was repaid (see Note 3 – Borrowing Arrangements).
FEDERAL, FOREIGN AND STATE INCOME TAXES
During the 2010 first quarter the Company recorded a tax benefit of $475,000 on its pre-tax loss of $1,667,000. The tax benefit is lower than the statutory rate due to state taxes provided on income from Royal Sonesta Hotel New Orleans.
In the 2009 first quarter the Company recorded a tax benefit of $790,000 on its pre-tax loss of $3,002,000. The tax benefit is lower than the statutory rate, due to state taxes payable on the Company’s income from Royal Sonesta Hotel New Orleans and due to foreign taxes provided on the Company’s income from its hotels in Egypt and Peru.
The Company recorded long-term deferred tax assets in the 2010 first quarter for the future federal and state income tax benefits of the losses incurred. The Company will monitor these tax assets, and provide for valuation allowances if going forward it becomes uncertain whether it will actually receive federal and state tax benefits for these losses.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of approximately $26.4 million at March 31, 2010. Company management believes these cash resources will be adequate to meet its cash requirements for 2010 and beyond.
In February 2010, the Company refinanced the mortgage loan on Royal Sonesta Hotel Boston. A new $32,000,000 loan repaid the $31,644,000 outstanding under the previous loan. Costs incurred in connection with the refinancing totaled approximately $400,000, which included a 1% fee to the lender. The interest rate on the new 5 year loan is a variable rate based on LIBOR, but the Company has entered into an interest rate swap agreement that provides for a 6.4% interest rate for the term of the loan. The previous loan carried an 8.6% interest rate. Payments of interest and principal on the new loan, based on a 25 year amortization period, will be approximately $650,000 per quarter. The payments on the previous loan totaled $999,000 per quarter. In addition to a first mortgage on the Royal Sonesta Hotel Boston property and a $5,000,000 parent company guarantee, the Company also provided a $5,000,000 cash collateral account as additional security for the loan. This amount is included in restricted cash on the Company’s balance sheet at March 31, 2010. The cash collateral account will be released over a 2 year period provided the hotel achieves certain debt service coverage ratios. The loan is subject to a maximum loan to value ratio, and to minimum debt service coverage ratios, which will be tested quarterly.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued)
In connection with the extension of the license agreements for two hotels in St. Maarten through December 2019 (subject to a mutual cancellation option beginning in May 2015), the Company agreed to loan the owners of these hotels up to $1 million for improvements to the properties. The Company expects to fund these amounts during 2010.
In January 2010 the Company made a $500,000 loan to the owner of Sonesta Beach Resort Sharm El Sheikh. The proceeds of this loan were used to complete Le Royale Sharm El Sheikh, a Sonesta Collection luxury resort. This 165 room boutique property was built adjacent to the Sonesta Beach Resort property, and is managed by the Company.
QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The Company is subject to the risk of loss associated with movements in market interest rates. The Company manages this risk through the use of an interest rate swap that hedges the Company’s $32,000,000 mortgage loan at a fixed rate of 6.4%.
INTERNAL CONTROLS AND PROCEDURES
As of March 31, 2010, the Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and President, Chief Executive Officer and Vice Chairman, and Vice President and Treasurer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934. Based on that evaluation, the Company’s Chief Executive Officer and President, Chief Executive Officer and Vice Chairman, and Vice President and Treasurer concluded that the Company’s disclosure controls and procedures are effective, as of March 31, 2010.
There have been no significant changes in the Company’s internal controls regarding financial reporting during the quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control regarding financial reporting, including any corrective actions with regard to significant deficiencies and material weaknesses.
Item Numbers 1, 2, 3, 4, 5 and 6
Not applicable during the quarter ended March 31, 2010.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
SONESTA INTERNATIONAL HOTELS CORPORATION | ||
By: | /s/ Boy van Riel | |
Boy van Riel | ||
Vice President and Treasurer | ||
(Authorized to sign on behalf of the Registrant as Principal Financial Officer) | ||
Date: May 13, 2010 |
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